Legg Mason Files For ‘Clone’ Of MINT; Is A Savings Account Better?

By Murray Coleman

Asset manager Legg Mason (LM) has filed with the Securities and Exchange Commission to launch its first exchange-traded fund.

The Legg Mason Western Asset Ultra-Short Duration ETF would be actively managed and invest in short-term, investment-grade fixed-income securities that include corporate debt securities, bank obligations, mortgage-backed securities, as well as securities issued by the U.S. government and foreign governments.

The new fund will essentially serve as a clone to the popular Pimco Enhanced Short Maturity Strategy Fund (MINT), says Jim Wiandt, founder and CEO of research provider IndexUniverse.com.

“Legg Mason obviously has an eye on the $1.6 billion in assets that MINT’s been able to attract,” he observes.

Alternatives to money market mutual funds are a hot item. With central banks across the globe flooding markets with liquidity and short-term rates still at historically low rates in the U.S., investment flows have dropped significantly into traditional money market funds. Over the past year, an estimated $160 billion has flowed out of such mutual funds, says Morningstar.

By comparison, MINT has seen net inflows of more than $770 million this year alone. It’s the biggest actively managed ETF on the market and “is the only real ETF to really take advantage of the gap between money market funds and traditional bond funds,” says Samuel Lee, a Morningstar analyst.

MINT doesn’t promise a steady net asset value. In theory, it can “break the buck,” a reference to the fact that money markets aim to keep from letting net asset values fall below $1. As a result, most money markets take few chances and offer little more return when rates are low than “putting money under a pillow,” Lee says.

By comparison, MINT can venture into slightly longer-termed assets. It can also dip into somewhat lower credit-quality issues in order to pick-up some additional yield. The result is that the ETF’s portfolio has an effective duration of less than one year. “That’s still pretty short-term for a fixed-income fund,” notes Lee.

MINT’s yield-to-maturity is just slightly above 2%. But after-fees, it falls to around 1.7%. “Even a 1% advantage over money market funds in a low-return environment is huge,” says Lee.

But Pimco also runs an ultra-short bond mutual fund (PTSHX). “They use very similar strategies and invest in similar types of assets,” says Lee.

He points out that PTSHX lost 1.3% in 2008. From peak to trough of the financial crisis, the fund had a drawdown of about 4%.

Lee suggests that investors weigh such increased risks when considering alternatives to money market funds. One option is to shop for an appropriate high-yield savings account, which in many instances can compete quite well against ETF complements. “You generally don’t pay fees to move out of savings accounts and they’re backed by FDIC insurance,” Lee says. “In almost every aspect, they’re going to be better bets than MINT or other similar funds.”

But there are caveats. For one, savings accounts have limits on how many times you can shift money around in a month between accounts. Also, banks will sometimes offer premium yields on only a certain portion of an investment.

So who can benefit the most from cash complements in an ETF format? Institutions and high net-worth individuals who want to park a lot of cash somewhere and earn better yields are two types of investors who still are likely to find the most appeal in such alternatives.

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NOVEMBER 29, 2011 7:51 P.M.

Robert J. Cohen wrote:

Excellent piece. I agree with Mr. Lee from Morningstar; for a few years now, select bank and credit union products paying above-market rates, with zero risk to principal, have been more appealing than money market and (ultra)short term bond funds.

A few additional points about why investors might still use MINT:

1. Brokerage accounts cannot custody bank savings accounts.
2. It's a hassle to move cash out of retirement accounts to a new bank custodian (and then back again later).
3. Keeping cash in MINT means it's available intraday to swap into other securities.
3. Most financial advisers don't want to bother helping clients set up a separately registered bank savings account; it takes a bit of work, and it raises the question of charging asset management fees on cash.

About Focus on Funds

As exchange-traded funds and other investing vehicles have ballooned in number, the task of figuring out what works well and what doesn’t has only gotten harder. Barrons.com’s Focus on Funds looks under the hood of ETFs, mutual funds and hedge funds for overlooked values, actionable ideas and the latest pitfalls for fund investors.

Chris Dieterich has covered the U.S. stock market for The Wall Street Journal and Dow Jones Newswires. He is a graduate of Regis University and the Missouri School of Journalism.